What are Technical Indicators?

Technical Indicators are part of technical analysis and are used to help you make an educated trading decision. Paired with the right risk management tools, they help you gauge the price trends.

Using data, price and volume, technical indicators can indicate what direction the financial asset is going in a foreseen period of time. This information can help you identify the best possible trading opportunities.

What are the types of Technical Indicators?

There are several types of trading indicators, including leading indicators and lagging indicators. A leading indicator is an indicator that gives the signal prior to the initial movement in the price of the asset, while the lagging indicator gives the signal after the initial movement and confirms the current trend.

What are some commonly used Technical Indicators?

Moving Average Indicator

Exponential Moving Average Indicator

Moving Average Convergence Divergence

Relative Strength Index

MA (Moving Average Indicator)

It is one of the most popular lagging technical indicators and is used to identify the ongoing price trend in the market. It combines the price points of an instrument over a specified time frame (15, 20, 30, 50, 100, or 200 candles or periods) and divides by the number of data points, to give you a single trend line. Averaging the data like this enables you to confirm the direction of the current trend while lessening the impact of random price spikes.

In most cases, when the prices move above the Moving Average then the ongoing trend is considered to be an uptrend whereas when the prices move below the Moving Average then the ongoing trend is considered to be a downtrend.

There are many distinct types of moving averages, and some traders use more than one to confirm their signals. Some examples include simple moving averages and exponential (more weight given to recent numbers)

Exponential Moving Average

The exponential moving average (EMA) is a technical indicator that is designed to improve the idea of the Simple Moving Average (SMA) by giving more weight to the most recent price data, which is considered to be more relevant than older data.

It is placed like a line on the price chart based on a mathematical formula to smooth out the price action. By allocating more weight to the recent price and less weight to prices that occurred in the past, the EMA adapts more quickly to the latest price changes in price data than the SMA, which applies an equal weight to all observations in the period.

To use EMA, go to our MT4 platform and simply select the EMA from the indicators list. You can also adjust how many periods it should calculate. Periods of 50, 100, and 200 are commonly used by traders who track price action back to months or years. On the other hand, the 12 and 26-periods EMA are largely popular for shorter time frames.

MACD (Moving Average Convergence Divergence)

Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of an instrument’s price. The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA.

MACD = 12-period EMA – 26-period EMA

The result of that calculation is the MACD line. A nine-day EMA of the MACD is called the “signal line”. It is then plotted on top of the MACD line, which functions as a trigger for buy and sell signals. Traders may buy an instrument when the MACD crosses above its signal line and sell the instrument when the MACD crosses below the signal line. Moving average convergence divergence (MACD) indicators can be interpreted in several ways, but the more common methods are crossovers, divergences, and rapid rises/falls.

RSI (Relative Strength Index)

The relative strength index (RSI) is a momentum indicator used in technical analysis that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of an asset. It is displayed as an oscillator (a line graph that moves between two extremes) and can have a reading from 0 to 100.

According to a traditional relative strength index meaning, all values above 70 may indicate that an asset is being overbought and may be ready for a trend reversal or pullback. On the other hand, an RSI value below 30 may signal that the asset is being oversold and undervalued. These lines are called the overbought and oversold lines.

The RSI shows a potential buy signal when the RSI crosses and moves above the oversold line (30). The RSI shows a potential sell signal when the RSI crosses below the overbought line (70).